1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Winston Kwok, Ph.D., CA Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved Chapter 11 C URRENT L IABILITIES

2. 11 - 2 D EFINING L IABILITIES C 1

3. 11 - 3 C LASSIFYING L IABILITIES Expected to be paid within one year or the company’s operating cycle, whichever is longer. Current Liabilities Not expected to be paid within one year or the company’s operating cycle, whichever is longer. Long-Term Liabilities C 1

4. 11 - 4 C URRENT L IABILITIES Current Liabilities as a Percent of Total Liabilities C 1

5. 11 - 5 U NCERTAINTY IN L IABILITIES Uncertainty in When to Pay C 1 Uncertainty in Whom to Pay Uncertainty in How Much to Pay

6. 11 - 6 Accounts Payable Sales Taxes Payable Unearned Revenues Short-Term Notes Payable K NOWN L IABILITIES Payroll Liabilities Multi-Period Known Liabilities C 2

7. 11 - 7 Sales taxes are called goods and services taxes in come countries. On August 31, Harvey Norman sold materials for $6,000 that are subject to a 10% goods and services tax (GST). S ALES T AXES P AYABLE C 2 $6,000 × 10% = $600

8. 11 - 8 On June 30, Beyonce sells $5,000,000 in tickets for eight concerts. U NEARNED R EVENUES C 2 On Oct. 31, Beyonce performs a concert. $5,000,000 / 8 = $625,000

9. 11 - 9 A written promise to pay a specified amount on a definite future date within one year or the company’s operating cycle, whichever is longer. S HORT -T ERM N OTES P AYABLE P 1

10. 11 - 10 On August 23, Brady Company asks McGraw to accept $100 cash and a 60-day, 12% $500 note to replace its existing $600 Account Payable. N OTE G IVEN TO E XTEND C REDIT P ERIOD P 1

11. 11 - 11 On October 22, Brady pays the note plus interest to McGraw. N OTE G IVEN TO E XTEND C REDIT P ERIOD P 1 Interest expense = $500 × 12% × (60 ÷ 360) = $10

12. 11 - 12 NOTE GIVEN TO BORROW FROM BANK P 1

13. 11 - 13 N OTE G IVEN TO B ORROW FROM B ANK On Sept. 30, a company borrows $2,000 from a bank at 12% interest for 60 days. P 1 On Nov. 29, the company repays the principal of the note plus interest. Interest expense = $2,000 × 12% × (60 ÷ 360) = $40

14. 11 - 14 Note Date End of Period Maturity Date An adjusting entry is required to record Interest Expense incurred to date. E ND - OF -P ERIOD A DJUSTMENT TO N OTES P 1

15. 11 - 15 E ND - OF -P ERIOD A DJUSTMENT TO N OTES P 1 On Dec. 16, 2011, a company borrows $2,000 from a bank at 12% interest for 60 days. An adjusting entry is needed on December 31. On Feb. 14, 2012, the company repays this principal and interest on the note.

16. 11 - 16 P AYROLL L IABILITIES Employers incur expenses and liabilities from having employees. P 2

17. 11 - 17 An entry to record payroll expenses and deductions for an employee in Singapore might look like this. R ECORDING E MPLOYEE P AYROLL D EDUCTIONS P 2

18. 11 - 18 M ULTI -P ERIOD K NOWN L IABILITIES Includes Unearned Revenues and Notes Payable Unearned Revenues from magazine subscriptions often cover more than one accounting period. A portion of the earned revenue is recognized each period and the Unearned Revenue account is reduced. Notes Payable often extend over more than one accounting period. A three- year note would be classified as a current liability for one year and a long-term liability for two years. C 2

19. 11 - 19 E STIMATED L IABILITIES An estimated liability is a known obligation of an uncertain amount, but one that can be reliably estimated. P 4

20. 11 - 20 W ARRANTY L IABILITIES Seller’s obligation to replace or correct a product (or service) that fails to perform as expected within a specified period. To comply with the full disclosure and matching principles, the seller reports expected warranty expense in the period when revenue from the sale is reported. P 4

21. 11 - 21 W ARRANTY L IABILITIES P 4 On Dec. 1, 2011, a dealer sells a car for $16,000 with a maximum one-year or 12,000 mile warranty covering parts. Past experience indicates warranty expenses average 4% of a car’s selling price. On Jan. 9, 2012, the customer returns the car for repairs. The dealer replaces parts costing $200.

22. 11 - 22 A CCOUNTING FOR C ONTINGENT L IABILITIES C 3

23. 11 - 23 P OSSIBLE C ONTINGENT L IABILITIES Potential Legal Claims – A potential claim is recorded if the amount can be reliably estimated and payment for damages is probable. Debt Guarantees – The guarantor usually discloses the guarantee in its financial statement notes. If it is probable that the debtor will default, the guarantor should record and report the guarantee as a liability. C 3

24. 11 - 24 If profit before interest and taxes varies greatly from year to year, fixed interest charges can increase the risk that an owner will not earn a positive return and be unable to pay interest charges. T IMES I NTEREST E ARNED Times interest earned Profit before interest expense and income taxes Interest expense = A 1

25. 11 - 25 E ND OF C HAPTER 11